Carrier Channel: Power Shifting in IP Peering

By Khali Henderson

Posted: 3/2003

Power Shifting in IP Peering

By Khali Henderson

The recent dispute between America
Online Inc. and Cogent Communications Group Inc. has thrust peering policies
into the spotlight. At issue has been AOL’s assessment that Cogent must pay to
peer with the ISP because it sends three times as much traffic to AOL as AOL
sends back to Cogent.

Cogent inherited the peering
arrangement with AOL when it acquired PSINet Inc. According to an article in the
Washington Post, AOL told Cogent in December it would charge the carrier
$75,000 a month to exchange traffic that previously had been free. When Cogent
did not meet AOL’s traffic ratio criteria after what AOL claims was two trial
runs, its connection was cut off Dec. 16, the newspaper said.

Peering allows two providers
exchanging large volumes of traffic to save money by connecting directly, rather
than routing traffic through their paid transit lines. Peering does not provide
access to the entire Internet, only the other ISP’s customers. Peers can link up
via a circuit-based connection, but usually connect less expensively where their
networks run through the same data center or carrier hotel.

Unlike most bilateral agreements,
peering is usually settlement-free, but not always. Paid peering arrangements,
like the one AOL requested from Cogent, also exist. This became a common
arrangement about five years ago among hosting companies and network service
providers that hooked up at an exchange point.

"This is where the definition
of peering started to get gray," says Jay Adelson, co-founder and CTO, for
Equinix Inc., which operates 15 Internet Business Exchanges (IBXs) in six
countries. Adelson says another shift is afoot as we see more and more peering
relationships between network providers and content providers like Yahoo!,
Google and Electronic Arts.

"I think it is an important
fundamental shift in the Internet hierarchy and the way money travels on the
Internet," he says. "You have got a company like Yahoo! that is
pushing well over 8gbps of traffic, pushing almost half of that not only across
connections that are direct, but across free connections. So, half of their
Internet traffic, they don’t have to pay for."

Interestingly, content providers are
exempt from the traffic-balancing requirements ISPs impose on each other.
"If a majority of ISPs pay [via transit] to get to Yahoo!, what is it worth
to them to have a free connection? I am cutting my costs and in some cases
significantly increasing my performance when I establish that direct
connection," Adelson explains.

The company in the middle, the
transit provider, however, does not benefit from this arrangement. These
providers traditionally charged content providers to get to networks with users
— what Adelson calls "eyeball networks" like Earthlink Inc. and AOL
— and they charged eyeball networks to get to content providers. "They
collected on both sides yet the value that they added was questionable once the
Internet became so pervasive [and] the exchange points became so well
populated," he says.

This leads to the question about
whether a content provider can charge for access to its content and a last-mile
network can charge for access to its users. The answer is, yes. Adelson says in
the IBX, there is a provider paying for a direct connection to a content
provider.

The money flow may seem backward to
many in the telecom industry. Ultimately, it leads to the discussion of where
the value lies on the Internet — is it with the content, the last mile or the
long haul? "The eyeball networks and the content providers have established
themselves as the valuable commodities on the Internet today," say Adelson.
"The intermediate network providers are really struggling to establish
value in this level playing field."

A recent report from TeleGeography
Inc., "U.S. Internet Geography 2003," notes IP transit prices have
dropped 40 percent to 50 percent in each of the last two years. "Part of
this plunge can be attributed to declining costs. Prices for fiber-optic
capacity, the building blocks for IP networks, have plummeted by more than 70
percent per year," the report notes. "However, much of the decline in
IP transit prices can be linked to intense competition."

TeleGeography says while the number
of companies selling backbone access is likely to contract, a new breed of
backbone operators may arise. "One possible path would lead to a new raft
of national backbones designed less for selling wholesale access upstream than
for serving an existing customer base of individual end users downstream,"
the report notes. The research firm cites AOL’s rebuilding of a national network
and the expanding RBOC networks as potential equals to today’s top-tier ISPs.

Others cite Excite@Home’s demise as
being a wake-up call for the cable companies to build their own networks rather
than pay transit providers.

"The playing field has become
more and more level," adds Adelson. "Companies like AOL or Earthlink
or others start to exert themselves and say, ‘Look, I’m not one of those
traditional transit players, but I have an eyeball network that is valuable. You
don’t need to go through one of these transit players, peer with me now.’ Now,
that’s happened and the traditional hierarchy of 10-15 [big players] and
everyone else was tiny has leveled out and has made it more and more possible
for these partial transit and paid peering type of arrangements."

Partial transit is offering a subset
of a routing table, e.g. just who they peer with, for a reduced price from
transit — a practice that is common in Europe as an alternative to the
all-or-nothing policies of traditional peering and transit relationships in the
United States.

"As these shifts to other forms
of activity have happened, the amount of users that I reach through those
traditional players has shrunken. Now, to get directly to user X, I have so many
different ways to do it, including going directly to user X that I have to weigh
out my cost benefit," says Adelson.